Participant fee disclosure: 404(a)(5) compliance is sucking large amounts of resources from the retirement system: time, money and a lot of trees. Ultimately, much of these costs are being absorbed by plan participants. The information being disclosed has generally been available to plan participants all along in prospectuses, fact sheets, enrollment materials and in other routine plan communications. Lawyers, printers and the U.S. Postal Service are enjoying a windfall, but we don’t see much net benefit for employees.
In our many years interacting with plan fiduciaries, we see they overwhelmingly want to do the right thing. 408(b)(2) has been very beneficial. It has provided focus and it has made key information more accessible (see “Turn Fee Disclosure Lemons into Lemonade”). We would have advocated a wider separation between plan-level and participant-level disclosure, to give fiduciaries time to consider options and take action where indicated.
Stirring the pot: With participant fee disclosure, the Department of Labor (DOL) is stirring the pot. Rather than waiting a reasonable period to see if employers take appropriate actions based upon the 408(b)(2) disclosures, they seem to be trying to provoke participants to agitate for, or migrate to, lower cost investment options. While squeezing excess costs from plans is an incontrovertibly worthy objective, few participants have the specialized knowledge or perspective to further this goal.
This well-intentioned, but misguided “pot stirring” may bring unintended negative consequences. By understanding and being prepared for them, you can help your employees avoid cooking themselves.
- Example 1: A participant with an existing risk-appropriate asset allocation might be driven to exchange their balance into their plan’s low-cost stock index fund. 404(a)(5) told them that the annual expenses of the index fund are lower, but it didn’t tell them that the standard deviation of return (common measure of risk) of the index fund might be higher by a factor of 2 or 3 times compared with the conservative or moderate investment mix they might have had to begin with. Study after study has documented the propensity of individual investors to sell their investments during severe market downturns when their risk tolerances were exceeded.
We’re very much in favor of offering low-cost menu options, but the “cheaper is always better” camp should spend more time studying investor behavior. In the real world, locking in large losses by selling near the bottom can be far more costly to a participant than having paid a higher average expense on their original mix.
Ongoing employee education about the benefits of having a risk-appropriate mix of investments is always a good idea – especially now.
- Example 2: Even if direct plan costs are covered by plan participants, the employer still incurs expenses when they sponsor a retirement plan. These can include the staff expense associated with plan administration, the cost of any employer contributions, and the fiduciary risk involved. Some measurable portion of employers will be more than happy to stop offering this benefit if enough employees are provoked by the disclosures to complain vocally about how lousy their plan is. If it’s a really lousy plan, employees may be better off without it, but those types of plans are the real outliers. Understanding that you may receive unreasonable backlash, and being prepared for it, will help to mitigate this risk.